What is Planned Giving?

Planned giving, sometimes referred to as gift planning, may be defined as a method of supporting non-profits and charities that enables philanthropic individuals or donors to make larger gifts than they could make from their income. While some planned gifts provide a life-long income to the donor, others use estate and tax planning techniques to provide for charity and other heirs in ways that maximize the gift and/or minimize its impact on the donor's estate.

Thus, by definition, a planned gift is any major gift, made in lifetime or at death as part of a donor’s overall financial and/or estate planning.

By contrast, gifts to the annual fund or for membership dues are made from a donor’s discretionary income, and while they may be budgeted for, they are not planned.

Whether a donor uses cash, appreciated securities/stock, real estate, artwork, partnership interests, personal property, life insurance, a retirement plan, etc., the benefits of funding a planned gift can make this type of charitable giving very attractive to both donor and charity.

What are the 3 types of planned gifts?

First, outright gifts that use appreciated assets as a substitute for cash;

Second, gifts that return income or other financial benefits to the donor in return for the contribution;

Third, gifts payable upon the donor’s death.

From a clever marketing perspective for your prospects, however, these should be handled differently as you can see here. (Notice the three categories under "Ways of Giving".)

What gift plans return income to donors?

Charitable gift annuities make fixed payments, starting either when the gift is made (an immediate-payment gift annuity) or at a later date (a deferred or flexible gift annuity). Some organizations maintain pooled income funds, which commingle donations, pay beneficiaries variable depending on the earnings of the fund, and generally operate like a charitable mutual fund. Charitable remainder unitrusts and annuity trusts are individually managed trusts that pay the beneficiaries either a fixed percentage of trust income or a fixed dollar amount.

What are the tax benefits of planned gifts?

Donors can contribute appreciated property, like securities or real estate, receive a charitable deduction for the full market value of the asset, and pay no capital gains tax on the transfer.

Donors who establish a life-income gift receive a tax deduction for the full, fair market value of the assets contributed, minus the present value of the income interest retained; if they fund their gift with appreciated property they pay no upfront capital gains tax on the transfer.

Gifts payable to charity upon the donor’s death, like a bequest or a beneficiary designation in a life insurance policy or retirement account, do not generate a lifetime income tax deduction for the donor, but they are exempt from estate tax.

The Most Popular Planned Gifts

Donors include a provision in their will directing that a gift be paid to your organization after their death or the death of one of their survivors.

Donors can give your organization either a specific amount of money or item of property (a “specific” bequest), or a percentage of the balance remaining in their estate after taxes, expenses, and specific bequests have been paid (a “residual” bequest).

Also, donors can tell you to use their bequest for a particular program or activity at your organization, or allow you to use it at your discretion (“restricted” and “unrestricted” bequests).

Donors make a gift to your organization and in return, you agree to make fixed payments to them for life. Payments may be made to a maximum of two beneficiaries. At the death of the last beneficiary, the remaining balance of the annuity is used by your organization for the purpose that the donor specified when the gift was made.

Gift annuities operate under a simple contract between you and the donor. They are not trusts, but rather income obligations backed by your organization’s assets.

Payments from a gift annuity can be arranged to commence at a future date ( a “deferred” gift annuity). Deferring the start of payments gives donors a higher income rate and a larger charitable deduction than they could secure from annuities whose payments start immediately.

This trust pays income to the donor and/or other beneficiaries for life or a term of years, then pays the remaining balance to charity. Income is paid as a fixed percentage of the unitrust’s value – which is revalued annually. Income and appreciation in excess of the required payments to the beneficiaries are held in the unitrust to allow growth.

This trust pays the donor and/or other beneficiaries a fixed-dollar amount of income for life or a term of years, then pays the remaining balance to charity. Unlike income from a unitrust, payments from an annuity trust do not fluctuate during the term of the trust.

This trust pays income to your organization for a term of years or for the lifetime of the donor. When the lead trust terminates, the remaining balance is returned to the donor or to the donor’s heirs.

Donors who arrange their lead trusts to return the assets to themselves may claim a charitable income tax deduction when they make their gift, for the present value of the anticipated payments to charity. They are liable for income tax on the lead trust’s annual earnings.

Donors whose lead trusts distribute their remainder to children or other heirs receive no income tax deduction, but can gain significant gift and estate tax savings.

The death benefit of a life insurance policy can be paid to your organization as a charitable gift.

Donors have several options in giving you life insurance:

They can contribute a fully paid-up policy, or

They can contribute a policy on which some premiums remain to be paid. In both of these cases, the donor can claim a charitable deduction for the value of the donated policy, and your organization can “cash in” the policy in advance of the donor’s death.

Donors can (revocably) name your organization as the beneficiary of a life insurance policy that they continue to own and maintain, or

They can name you the owner and beneficiary of a new life insurance policy, and make ongoing gifts that offset the premiums you will pay to maintain the policy. There is no charitable deduction available for taking out a new life insurance policy, even if the donor makes you the irrevocable owner.

Donors can name your organization the successor beneficiary of all or a portion of their IRA, 401(k), or other retirement accounts. The designation is revocable and does not generate a charitable income tax deduction, but:

Distributions from retirement accounts to surviving family members can be subject to both income and estate tax. Directing the balance of a retirement plan to charity removes the most-taxed asset from the donor’s estate, freeing up other, more favorably taxed assets to give to family and heirs.

Donors have the reassurance that they can continue to take withdrawals from their plan during lifetime, and that they can change the designation of the charitable beneficiary if their or their family’s circumstances change.

Slip this handy booklet into your pocket before your next round of prospect calls. It's not another ways-of-giving brochure — it's a "why's of giving" that helps you better understand the upside and downside of different giving options for both you and your prospects.